Before further discussion on the productivity spillovers effect, it is important to introduce the term conceptually and analytically so that it gives operationable quality to the study.
When companies establish affiliates abroad, they differ from existing firms in the host country for two reasons. One is that they bring with them some amount of the proprietary technology that constitutes their firm-specific advantage, and allows them to compete successfully with other MNCs and local firms that presumably have superior knowledge of local markets, consumer preferences, and business practices.
In industries with rapidly changing technologies (and, more generally, in developing host countries), the competitive assets of MNCs are likely to be related to new products 98 Kong-Yew Wong and Tom Baum
and processes. In mature industries, MNCs may base their competitiveness more on mar- keting skills or organisational advantages, such as the ability to specialise across interna- tional borders, in order to exploit the local comparative advantages of various host countries. Another reason is that the entry and presence of MNC affiliates disturb the exist- ing equilibrium in the market and force local firms to take action to protect their market shares and profits. Both these changes are likely to cause various types of spillovers that lead to productivity increases in local firms.
Generally, productivity spillovers are said to take place when the entry or presence of MNC affiliates leads to productivity or efficiency benefits in the host country’s local firms, and the MNCs are not able to internalise the full value of these benefits (Blomstrom, Kokko, & Zejan, 2000).
Identifying Spillovers from MNC Activities
Contagion and demonstration effects This section discusses contagion and demonstra- tion effects that result from the presence of international hotel chains in host destinations.
Activities by MNC affiliates in a host country with potential productivity spillovers can be broadly classified into two categories: (i) within the host destination and (ii) between destinations.
(i) Within the host destination, MNC affiliates engage in internal operations as well as external linkages with suppliers both forward (coach operators, local travel agents, theme park operators, MICE operators, etc.) and backward (F&B suppliers, sanitation service providers, hotel’s architects, etc.). The uniqueness of the tourism industry or more specifically the hotel industry is where both forward and backward linkages are of equal importance (Dunning & McQueen, 1982).
Therefore, more often than not, high-quality goods and services are expected by the MNC from its supplier, because the MNC’s major competitive advantage is its estab- lished brand name that is associated with perceived international quality standard by international travellers. Therefore, local suppliers will have to meet these detailed specifications of products, produce, and services set by international chain hotels. It is from these rigorous processes and requirements that we would expect to have initial evidence of productivity spillovers.
The evidence can be witnessed when, for example, local suppliers that have increased their goods and service quality according to ‘international standards’ are able to supply identical goods and services to local hotels. This new technology that a local supplier obtains as a result of its affiliation with international chain hotels is therefore available to the local industry and may also experience economies of scale (Go & Pine, 1995; Blomstrom et al., 2000). This may not have been possible earlier for a number of reasons: the costs could be too high for local hotels to initiate the use, the technology is not required given the competitive environment before the presence of foreign multinational hotels, and local firms have limited information about costs and benefits of the new technology. However, as a result of the presence of multina- tional hotels, the industry competitive equilibrium has been disturbed (Caves, 1996) and local firms have more information about new technology from MNC affiliates Tourism Industrial Development and Multinational Corporations 99
(Blomstrom et al., 2000). Therefore, adaptation or change becomes necessary and less risky at the same time (Caves, 1996).
When local hotels’ market position is being threatened by the presence of foreign hotels, this implies that existing technology used by local hotels is relatively inferior to their foreign counterparts. Local hotels are believed to be weaker in relative terms in their knowledge of international traveller’s wants and needs, international affiliation with tour operators, airlines and also other foreign international hotel chains, and pos- sibly experience in operating in and developing a destination (Dunnings & McQueen, 1982). Foreign multinational hotels enter the host industry with the technology that they already own and have established, and expect to yield additional returns (Caves, 1996; Rodriguez, 2002). This is also known as rent-seeking activities by multinational firms (Chrystal & Lipsey, 1997).
However, what this study is interested in is how the local hotel industry or the wider tourism industry can potentially benefit from the presence of this superior technology.
First of all, multinational affiliates’ operations in the host industry will create oppor- tunity for local employees to learn and to be trained in international hotel management skills that eventually will add value to their career development (Go & Pine, 1995). As Pine (1991) suggests specifically in relation to the hotel industry, this process is known as technology transfer. However, unless this employee leaves the multinational firms and successfully utilises his or her skills and knowledge in a local hotel, the industry will not experience productivity spillovers.
(ii) On the other hand, multinational affiliates in the host industry will closely link their corporate operational activities with the corporate home or regional office. Activities such as central purchasing units, sales and marketing promotion, reservation systems, corporate training, and corporate alliances and affiliations, give them a leading edge or comparative advantage in both technology know-how and cost efficiency (UNCTAD, 1997). These activities will directly and indirectly benefit the host industry and the des- tination. Examples of a direct benefit are activities such as sending local employees off- shore for corporate training programmes or to a new assignment in another destination (Go & Pine, 1995).
Another dimension of how MNC’s activities could potentially benefit the host nation is that it develops the host nation as an international destination. This means that the host destination becomes more accessible, gaining positive publicity and welcoming interna- tional trade of goods and services. Multinational corporations are influential in establish- ing new air and sea routes to destinations. Besides, tourism promotion has the tendency to boost the positive aspects of a destination rather than projecting negative attributes.
Destinations will begin to develop links with international distribution networks for goods and services. Once this is in place, the destination industrial environment will become more conducive to trade and therefore will attract more foreign investment and trading partners to the destination. This means, more international brand hotels will establish operations as well as international food chains, tour operators, airlines, and car rental companies. Within the wider service sector, we should also expect to see new interna- tional ventures such as banking, finance, and insurance in the destination.
This industrial multiplier effect, whether intentional or unintentional, will occur in a matter of time. This also explains how a destination gains its equity over time.
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Destination equity, used in this study, refers to the significant level of knowledge and information that a traveller has about a particular destination in making his/her choice and whether international brands are essential for a comfortable and safe stay. This is based on the argument that
foreign hotel accommodation as an ‘experience good’ often purchased in an unfamiliar environment where the trademark of the MNE hotel chain guar- antees a standard of service with the characteristics demanded by tourists (principally business tourists) from the principal tourist generating coun- tries. (Dunning & McQueen, 1982, p. 89)
This level of knowledge and information can be accumulated by a traveller’s own expe- riences, recommendations by friends and relatives, and information gathered from mass media such as television, printed material, internet, etc. Therefore, if there is evidence that suggests an increasing positive level of destination equity is occurring, one should expect greater spillover presence in the industry. This suggests that the destination is relatively less dependent on the presence of foreign international hotel chains.
Competition effect It does not matter which specific determinant is in place, in terms of ownership, location, and internalisation advantages as described in Dunning’s (1979) eclectic theory of international production, for an MNC to enter host industry. Whichever, it will create competitive disequilibrium in the host industry (Caves, 1996). It raises the level of market concentration in the host industry or spreads oligopolistic markets from the developed industry (home country) to the less developed industry (host country) (Hymer, 1960). The presence of rent-seeking MNCs imposes pressure on local firms to increase productivity and to improve efficiency either by using existing technology, acquiring new technology, or by innovation.
Of course, foreign entry may also force local firms out of the industry or to take over exist- ing local oligopolistic firms, and thereafter, monopolise the industry. Hence, the presence of competition-related spillovers between local and foreign multinationals is essential in any industry. Hypothetically speaking, the level of competition-related spillovers can be deter- mined by technology gaps that exist between local and foreign operations and vice versa.
However, since the hotel industry serves various categories of guests, whether segregated by social economic or geographical criteria, there may not be direct competition between hotels in a destination. Dev and Klein (1993) argues that luxury hotels often attempt to establish a unique market position in an effort to stay competitive, which includes branding and promotional efforts. This means allowing them to operate in an enclave environment (Jenkins, 1982; Blomstrom et al., 2000) and establishing both vertical and horizontal inte- gration to sustain this position (Claves, 1996). Thus, since competition exists only when two or more hotels are targeting the same segment of the market, there will not be any direct competition. Other explanations of the need for market positioning will be the presence of competition so that hotels of different classes are forced to focus on other specific markets (Dev & Klein, 1993). This could mean that, in this study, local hotels have no alternative but to forego the market segment that they used to enjoy before the advent of direct com- petition from or presence of a foreign multinational hotel chain.
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From the traveller’s point of view, the pull factor, it could be that brand and perceived international quality will influence the choice of a specific brand regardless of which geo- graphical region they are from. These travellers are either non-frequent travellers or are price insensitive and luxury oriented (Dev & Klein, 1993). Therefore, hotels in a destina- tion have to establish their brand equity to attract this specific group of travellers. This means that competing on the grounds of brand equity is unavoidable.
As a result, it is problematic to attempt to draw a line between hotels in order to segre- gate the competition environment in the market. Therefore, in this study, competition- related spillovers are indicated by the level of productivity of local hotels as a result of productivity spillovers from foreign hotels. This is based on the assumption that hotels are competing based on productivity, which is determined by efficiency in production.
Market access spillovers This study next discusses a conceptual phenomenon where empirical evidence is scarce. However, the acceptability and validity of this phenomenon should not be jeopardised by the lack of empirical evidence alone. The barrier that prevents the collection of empirical data related to this factor is caused by the complexity of the tourism industry, and limited and non-standardised statistical data between nations.
The concept of market access spillovers refers to the direct and indirect efforts by multi- national firms to transfer technology and establish networks, at international level, in the host industry (Kusluvan & Karamustafa, 2001). This leads to increases in international vis- itors that would not have been possible without the presence of the multinational’s affili- ates in the host country (Dunning & McQueen, 1982). As Blomstrom et al. (2000) suggest, being competent in manufacturing is not enough to become a successful exporter.
Companies need to learn to manage international marketing, distribution, and servicing of its products. Because these tasks are often associated with high fixed costs, few local firms, particularly those in developing countries, have the skills and resources to take on all these challenges on their own (UNCTAD, 1997).
In the context of the tourism industry, the statement above still fundamentally holds. A majority of tourism firms in many developing destinations have no technical know-how with which to break into international markets (Jenkins & Henry, 1982). The issue of pen- etrating into new international markets is a complex discussion topic. It involves questions of who pays or how should the cost be shared? — doubts between tax receiver and tax payer, and between sectors; questions of which market segment? — regions, social classes, interest groups, etc.; what tourism product should be offered? — the issue of sustainable tourism, alternative tourism, etc. (Burns & Holden, 1995).
For the purpose of this study, the focus concentrates on how the presence of foreign multinational hotels impacts on local hotels positively in terms of the number of foreign guests. If the assumption of superior knowledge of international tourism markets pos- sessed by foreign multinational hotels holds, the time dimension is important in discussing the impact. Initially, a destination needs international brand hotels to attract tourists from abroad. Presumably, international hotels will disproportionately attract tourists from their home country, e.g. Nikko Hotel will attract Japanese tourists and Hilton will attract North American and European tourists. As more international hotels open and there is an increase in international tourist arrivals to the destination, the local industry will have exposure to the technology in providing service to and accessing various market segments by 102 Kong-Yew Wong and Tom Baum
geographical boundary (country and regional), class of travellers (business, leisure, etc.), and tourism products (shopping, adventure, nature, etc.). International tourists and trav- ellers are now aware of the standards of local hospitality service providers, and therefore, will depend less on international brands (Dieke, 1993). Local hotels will use technology know-how from the distribution network established by international multinational hotels to access these markets.
This process takes time, and the length is highly dependent on the rate of productivity spillovers of both contagion and demonstration effects, as well as competition effects.
Therefore, one may suggest, market access spillovers are a product or evidence of positive productivity spillovers. This is a characteristic of developing host industries.